Dear Momentum Options Subscriber,
The bears snapped a five session losing streak on Tuesday, but the bulls were able to hold near-term support. Considering the gains over the past three weeks, a pullback was nearly a given, but higher highs could still be in store. One concern, however, is volatility, which is starting to percolate.
The Dow dropped 109 points, or 0.6%, to settle at 16,964. The blue-chips tested a low of 16,921 shortly after the open, with support at 16,900-16,800 standing tall. The bulls rebounded from the 152-point pullback to get within a point of positive territory. The high reached 17,072, but resistance is looming at 17,000-17,200.
The S&P 500 sank 22 points, or 1.1%, to close at 1,979. The index traded in negative territory throughout the session, with the low checking in at 1,977. Support at 1,975-1,970 held, but there is additional risk to 1,960-1,950 on a move below the latter. Resistance is at 1,990-2,000.
The Nasdaq stumbled 59 points, or 1.3%, to end at 4,648. Tech finished six-points off its low of 4,642, and the close below 4,650 was slightly bearish. This sets up risk to 4,600-4,550 on continued weakness. Resistance is at 4,675-4,700.
The Russell 2000 tanked 26 points, or 2.4%, to finish at 1,067. The small-caps were yesterday’s weakest link, and the index closed right at its session low. The move below 1,070 gets 1,060-1,050 back in play. Resistance is at 1,075-1,080.
The S&P 500 Volatility Index ($VIX, 18.67, up 1.32) made a run to 18.89, with the bears reclaiming the 200-day moving average. Wall Street is getting a little nervous, but there is wiggle room to 20-22.50 before I would get aggressively short.
I could have a New Trade or two shortly after the opening bell, so stay locked and loaded in case I take action.
From desk to press, futures look like this: Dow (+83); S&P 500 (+10); Nasdaq 100 (+22); Russell (+6).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 26-4 (87%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
All prices given in this update are current as of 8:00 a.m. EST.
I hereby disclose that I will be participating in the following trade(s). Every Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the portfolio.
Rambus (RMBS, $12.94, down $0.12)
RMBS April 13 calls (RMBS160415C00013000, $0.52, down $0.06)
Entry Price: $0.40 (3/7/2016)
Exit Target: $0.80
Stop Target: $0.42, raise to $0.45 (Stop Limit)
Action: Raise the Stop Limit from $0.42 to $0.45.
Shares traded to a low of $12.87 yesterday, with the options dipping to $0.47. Support is at $12.75-$12.60 and the 200-day moving average. Resistance is at $13.25.
You can view a chart for RMBS and read my write-up in the March 7 New Trade Alert.
Intel (INTC, $30.56, down $0.38)
INTC April 29 puts (INTC160415P00029000, $0.46, up $0.09)
Entry Price: $0.38 (3/7/2016)
Exit Target: $0.80
Stop Target: None
Action: Tuesday’s low tapped $30.38. Support is at $30.50-$30. A close below $30 should get $29-$28 in play. Short-term resistance is at $31-$31.50.
You can view a chart for INTC and read my write-up in the March 7 New Trade Alert.
CVS Health (CVS, $99.04, up $0.62)
CVS April 105 calls (CVS160415C00105000, $0.33, up $0.03)
Entry Price: $0.45 (3/4/2016)
Exit Target: $0.90
Stop Target: None
Action: Tuesday’s high reached $99.75. Resistance is at $100 and the 200-day moving average. Support is at $98, followed by $96.50 and the 100-day moving average.
You can view a detailed chart for CVS and read my write-up in the March 7 Pre-Market Update.
Green Dot (GDOT, $21.98, down $0.13)
GDOT June 22.50 calls (GDOT160617C00022500, $1.70, flat)
Entry Price: $0.70 (2/24/2016)
Exit Target: $2.10 (Limit Order on first half)
Stop Target: $1.40 (Stop Limit)
Action: Shares traded to another 52-week high of $22.46 on Tuesday before closing below $22. Multi-year resistance is at $22-$24. Support is at $21.75-$21.50.
Q: Should I purchase more contracts and add to an existing position when the price of one of your recommendations is dropping? — N.N.
A: As a general rule, I never advise that subscribers average down when trading options. Some traders might buy a “half position” at, for example, $1.00 and then buy a second “half position” if the option drops to $0.50. This would average the cost basis to $0.75, which would lower the exit point where the trade would make a profit.
This might look good on paper, but here is the problem. I hate being wrong about a trade, and to “double down” because the options got cheaper could make me wrong twice. It’s like throwing more good money at bad money in hopes of a trade coming back, and that’s not good advice.
In some cases, I have had options trades that were down 80%-90% come back to turn a profit, but those occurrences are rare. Options are also time sensitive, so I also have to be right about the direction of a stock within a certain amount of time. In my opinion, if the trade starts going against you, it’s always best to reassess the position or cut losses instead of thinking about adding to the position.
Q: The online brokerage firm that I use does not allow me to adjust stop limits on option trades during non-market hours. Is this normal for all online brokerage firms? This has affected me when we have very volatile opening sessions. Also, I have occasionally been stopped out of a few trades well in advance of your email/text alerts, sometimes by as many as 3 to 5 hours, and in a few instances this has caused me to be out of a trade when the trade is still open in the portfolio (sometimes for the better and sometimes not). Is this normal? Thanks. — E.B.
A: I’m not sure of all brokerage rules and regulations regarding stop limits because they can vary from firm to firm. I normally don’t list Stop Limits on options under $1.25 due to volatility, but when a trade starts to become profitable, I use them to our advantage.
Once I list a Stop Limit, I suggest you set one on the trade when the update is released. This might help some of your problems getting filled. As far as getting stopped out before receiving an email, if a Stop Limit is in place, I may wait until the Mid-Market Update, or perhaps the next morning, to update the information due to market conditions, timing and my schedule.
In any event, Stop Limits also help in case you are not actively watching your position throughout the day. Most days, I’m glued to the market and my monitors, but, if I step out for lunch or run an errand, I feel safe knowing my profits are protected.
Q: My buy limit order was not filled at $0.50 for Monday’s recommendation for the RMBS April 13 calls. Should I try to enter again the following day or pass and wait for another recommendation from you? Many thanks. — S.F.
A: Every trade that I make has an exit target for a 100% return. Sometimes, my recommended trades can become a nickel or a dime cheaper, or they can quickly jump by the same amount depending on the action.
Keep this in mind when entering a trade you may have missed because in the end, profits are what matters. In other words, if I recommended a trade at $0.50 with an exit target of $1.00, and it is now at $0.75, I still expect another $0.25 in profit.
Just like I don’t recommend a losing trade twice, I also can’t recommend a winning trade twice due to the parameters.
Q: Can you please explain what “delta,” “intrinsic value” and “extrinsic value” are in terms of options trading? — M.M.
A: These are fancy words that may intimidate new option traders, but they are easily understood.
Delta is a number that indicates the rate of change of an option’s price with respect to the underlying stock price. The delta ranges in value from 0 to 1 for call options and 0 to -1 for put options. Put option deltas can be negative, as a rising stock price decreases the value of the option.
The devised delta number reflects the increase or decrease in the price of the option in response to a $1 move in the stock. For example, if a call option has a delta of 0.5, it means that for every $1.00 the stock increases, the call option will increase by $0.50.
As far as “intrinsic value,” this is simply the part of an option’s premium that is “in-the-money.” I use the latter term often for both calls and puts once the strike price is breached. Call options are considered in the money when the strike price is less than the current stock price. A put option is in the money if its strike price is greater than the current underlying stock price.
The extrinsic value of an option represents the external factors that can impact the intrinsic value of an option such as time decay and volatility. I usually don’t like opening a new position without giving the trade at least 3-4 weeks to play out. Time premium can decay rapidly on out-of-the-money options that are expiring in a few weeks or days. I also refer to options that expire in three weeks or less as being in the danger zone.
For example, if a call option with a strike price of $10.00 is trading for $3.00, and the underlying stock is at $12.00, the call option has an intrinsic value of $2.00 (the portion that is in the money) and an extrinsic value of $1.00 (the additional premium due to external factors like time and volatility).
Great questions this week. Keep them coming!
Editor and Chief Options Strategist